<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
------------ -------------
Commission File Number: 33-69996
COMMONWEALTH INCOME & GROWTH FUND III
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2735641
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
1160 West Swedesford Road
Berwyn, Pennsylvania 19312
(Address, including zip code, of principal executive offices)
(610) 647-6800
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
YES [ X ] NO [ ]
<PAGE>
COMMONWEALTH INCOME & GROWTH III
BALANCE SHEETS
<TABLE>
<CAPTION>
(AUDITED)
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 175,198 $ 507,193
Lease income receivable 51,041 65,729
Other receivables and deposits 9,371 1,912
Computer equipment, at cost 3,238,058 1,453,742
Accumulated depreciation (490,248) (238,240)
----------- -----------
2,747,810 1,215,502
Equipment acquisition costs and deferred expenses,
net of accumulated amortization of $34,219 in
1999 and $20,779 in 1998 107,066 51,748
Organization costs, net of accumulated amortization
of $6,548 in 1999 and $4,248 in 1998 17,935 18,252
----------- -----------
Total Assets $ 3,108,421 $ 1,860,336
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 3,716 $ 38,355
Accounts payable - General Partner 361 349
Unearned lease income 43,498 52,192
Notes payable 1,263,730 8,442
----------- -----------
Total liabilities 1,311,305 99,338
Partners' capital:
General partner 1,000 1,000
Limited partner 1,796,116 1,759,998
----------- -----------
Total partners' capital 1,797,116 1,760,998
----------- -----------
Total Liabilities and partners' equity $ 3,108,421 $ 1,860,336
----------- -----------
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</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Income:
Lease $ 187,094 $ 62,315 $ 341,999 $ 62,315
Interest and other 4,055 14,663 7,317 26,937
------------- ------------- ------------ ------------
191,149 76,978 349,316 89,252
Expenses:
Operating, excluding depreciation 39,987 3,177 55,451 3,189
Equipment management fee - General Partner 11,427 3,116 19,173 3,116
Interest 134,784 40,889 252,008 40,889
Depreciation 8,432 10,496
Amortization of organizastion costs, equipment
acquisition costs and deferred expenses 7,569 4,894 16,420 11,122
------------- ------------- ------------ ------------
202,199 52,076 353,548 58,316
------------- ------------- ------------ ------------
Net income (loss) $ (11,050) $ 24,902 $ (4,232) $ 30,936
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Net income (loss) per equivalent limited
partnership unit $ (.010) $ 0.24 $ (0.02) $ 0.38
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Weighted Average number of equivalent limited
partnership units outstanding during the period 113,937 102,024 190,995 82,279
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
* OPERATIONS COMMENCED ON JANUARY 27, 1998.
SEE ACCOMPANYING NOTES.
<PAGE>
<TABLE>
<CAPTION>
PARTNER UNITS
------------------------------ GENERAL LIMITED
GENERAL LIMITED PARTNER PARTNER TOTAL
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Initial contribution - January 27, 1998 50 25 $ 1,000 $ 500 $ 1,500
Contributions -- 107,117 -- 2,142,340 2,142,340
Offering costs (234,641) (234,641)
Net income 1,691 16,559 18,250
Distributions (1,691) (164,760) (166,451)
----------------------------------------------------------------------------------
Partners' capital - December 31, 1998 50 107,142 1,000 1,759,998 1,760,998
Contributions 9,552 191,033 191,033
Offering costs (42,244) (42,244)
Net income (loss) 1,108 (5,340) (4,232)
Distributions (1,108) (107,331) (108,439)
----------------------------------------------------------------------------------
Partners' capital June 30, 1999 50 116,694 $ 1,000 $1,796,116 $1,797,116
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
AND
FROM JANUARY 27, 1998 (COMMENCEMENT OF OPERATIONS) TO 6/30/1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ (4,232) $ 30,936
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 268,745 52,011
Other noncash activities included in
determination of net income (56,342) (14,579)
Changes in operating assets and liabilities:
(Increase) decrease in lease income receivable 14,688 --
(Increase) decrease in other receivables (7,459) (20,136)
Increase (decrease) in accounts payable (34,639) 2,768
Increase (decrease) in accounts payable -
Commonwealth Capital Corp. -- 3,125
Increase (decrease) in accounts payable -
General Partner 12 3,616
Increase (decrease) in unearned lease income (8,694) 23,964
Organization cost paid to the General Partner -- (21,528)
----------- -----------
Net cash provided by operating activities 172,079 60,177
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INVESTING ACTIVITIES:
Capital expenditures (489,106) (832,801)
Net proceeds from the sale of property -- --
Equipment acquisition fees paid to General Partner (55,318) (69,395)
----------- -----------
Net cash provided by investing activities (544,424) (902,196)
FINANCING ACTIVITIES:
Partners' contributions 191,033 2,051,313
Offering costs (42,244) (224,505)
Debt placement fees paid to General Partner -- --
Distributions to partners (108,439) (71,022)
----------- -----------
Net cash used by financing activities 40,350 1,755,786
----------- -----------
Net increase (decrease) in cash and equivalents (331,995) 913,767
Cash and cash equivalents, begining of year 507,193 --
----------- -----------
Cash and cash equivalents, end of year $ 175,198 $ 913,767
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
COMMONWEALTH INCOME & GROWTH FUND III
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
BASIS OF PRESENTATION
The financial information presented as of any date other than December 31 has
been prepared from the books and records without audit. Financial information as
of December 31 has been derived from the audited financial statements of
Commonwealth Income & Growth Fund I (the "Partnership"), but does not include
all disclosures required by generally accepted accounting principles. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial information for
the periods indicated have been included. For further information regarding the
Partnership's accounting policies, refer to the financial statements and related
notes included in the Partnership's annual report on Form 10-K for the year
ended December 31, 1998.
NET INCOME PER EQUIVALENT LIMITED PARTNERSHIP UNIT
The net income per equivalent limited partnership unit is computed based upon
net income allocated to the limited partners and the weighted average number of
equivalent units outstanding during the period.
<PAGE>
PART II: OTHER INFORMATION
COMMONWEALTH INCOME & GROWTH FUND III
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership satisfied its minimum offering requirements and commenced
operations on January 27, 1998. On that date, subscribers for 76,284 Units were
admitted as Limited Partners of the Partnership. Through June 30, 1999,
subscribers owning an additional 43,401 Units were admitted as Limited Partners.
The Partnership's primary sources of capital for the six months ended June 30,
1999 and 1998 were from Partners' contributions of $191,000 and $2,051,000,
respectively. The primary uses of cash for the six months ended June 30, 1999
and 1998 were for the payment of offering costs of $42,000 and $225,000,
respectively, the payment of preferred distributions to partners of $108,000 and
$71,000, respectively, the payment of acquisition fees of $55,000 and $69,000,
respectively, and capital expenditures of $489,000 for the purchase of computer
equipment for the six months ended June 30, 1999.
Currently, Partners' contributions from the Partnership's leases are invested in
money market accounts investing directly in treasury obligations pending the
Partnership's use of such funds to purchase additional computer equipment, to
pay Partnership expenses or to make distributions to the Partners. At June 30,
1999 and December 31, 1998 the Partnership had approximately $175,000 and
$507,000, respectively, invested in these money market accounts.
The Partnership's investment strategy of acquiring computer equipment and
generally leasing it under "triple-net leases" to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses. As
of June 30, 1999, the Partnership had future minimum rentals on noncancellable
operating leases of $963,000 for the year ending December 31, 1999 and
$3,400,000, thereafter. The Partnership intends to continue purchasing
additional computer equipment with existing cash, as well as when future cash
becomes available.
The Partnership's cash from operations is expected to continue to be adequate to
cover all operating expenses, liabilities, and preferred distributions to
Partners during the next 12 month period. If available Cash Flow or Net
Disposition Proceeds are insufficient to cover the Partnership expenses and
liabilities on a short and long term basis, the Partnership will attempt to
obtain additional funds by disposing of or refinancing Equipment, or by
borrowing within its permissible limits. The Partnership may also reduce the
distributions to its Partners if it deems necessary. Since the Partnership's
leases are on a "triple-net" basis, no reserve for maintenance and repairs are
deemed necessary.
RESULTS OF OPERATIONS
For the quarter ended June 30, 1999, the Partnership recognized income of
$191,000 and expenses of $202,000, resulting in net loss of $11,000. For the
quarter ended March 31, 1998, the Partnership recognized income of $77,000, and
expenses of $52,000, resulting in net income of $25,000.
During the six months ended June 30, 1999, the Partnership expended $489,000 and
assumed debt of $1,263,000 to acquire three leases, which generated
approximately $71,000 in revenue.
Interest income decreased 71% from $14,000 for the quarter ended March 31, 1998
to $4,000 for the quarter ended June 30, 1999, primarily due to cash being
utilized to purchase computer equipment.
Operating expenses, excluding depreciation, primarily consist of accounting,
legal and outside service fees. The expense for the six months ended June 30,
1999 was approximately $40,000.
The equipment management fee is equal to 5% of the gross lease revenue
attributable to equipment which is subject to operating leases. The expense for
the six months ended June 30, 1999, was approximately $11,000.
Depreciation and amortization expenses consist of depreciation on computer
equipment, amortization of organizational costs, and equipment acquisition fees.
The expense for the six months ended June 30, 1999, was approximately $142,000.
For the three month period ended June 30, 1999, the Partnership generated cash
flow from operating activities of $172,000, which includes net loss of
$4,000, and depreciation and amortization expenses of $269,000. Other noncash
activities included in the determination of net income includes direct payments
of lease income by lessees to banks of $56,000.
<PAGE>
YEAR 2000 ISSUE
The Partnership and the General Partner are not responsible for ensuring that
the computer peripheral equipment that it leases to customers is Year 2000
compliant, however, this equipment may be subject to declines in value or
technological obsolescence. Management has considered these factors in
determining the recovery of its equipment at June 30, 1999, in accordance with
FASB Statement No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". Based on its current
assessment, the Partnership does not believe that the reduction in carrying
values of equipment, if any, due to the Year 2000 issues, will have a
significant effect on operations.
Based on recent assessments, the General Partner has determined that it will
be required to modify or replace portions of its own system so that its
operation will function properly with respect to dates in the year 2000 and
thereafter. The General Partner presently believes that with modifications to
existing software and conversions to new software, the Year 2000 issue will
not pose significant operational problems for its computer system. The General
Partner expects that its modifications will be complete by the third quarter
of 1999 and a percentage of these costs will be charged to the Partnership.
As of June 30, 1999, the General Partner has not incurred any significant
expenses.
<PAGE>
Item 1. LEGAL PROCEEDINGS.
Inapplicable
Item 2. CHANGES IN SECURITIES.
Inapplicable
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Inapplicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
Inapplicable
Item 5. OTHER INFORMATION.
Inapplicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits: None
b) Report on Form 8-K: None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMMONWEALTH INCOME & GROWTH FUND III
BY: COMMONWEALTH INCOME & GROWTH
FUND, INC. General Partner
August 12, 1999 By: /s/ George S. Sprinsteen
- ------------------ --------------------------------
Date George S. Sprinsteen
President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4
OF THE COMPANY'S FORM 10Q FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 175,198
<SECURITIES> 0
<RECEIVABLES> 60,412
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 125,000
<PP&E> 3,238,058
<DEPRECIATION> (490,248)
<TOTAL-ASSETS> 3,108,421
<CURRENT-LIABILITIES> 1,311,305
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,797,116
<TOTAL-LIABILITY-AND-EQUITY> 3,108,421
<SALES> 0
<TOTAL-REVENUES> 349,316
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 343,052
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,496
<INCOME-PRETAX> (4,232)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,232)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,232)
<EPS-BASIC> (.02)
<EPS-DILUTED> 0
</TABLE>
